MLC IncomeBuilder Ignite your earning potential

Transcription

1 MLC IncomeBuilder Ignite your earning potential

2 Share in the wealth you contribute to it! Every day, you come into contact with companies that are creating wealth for their shareholders. Are you getting your share? Why you need to invest in shares Share in the wealth. Over the long term, quality companies create wealth for their shareholders. If you re not investing in companies whose products you use every day, you re not getting your share. Generate tax-effective income. Through dividend imputation, investing in shares offers tax advantages you just can t get from any other investment. Achieve your financial goals. Share prices can be volatile, but investing in less volatile investments like cash and term deposits could mean putting your longterm financial goals at risk. A regular shopping trip Think about the last time you did the grocery shopping. You probably went to the local shopping centre (Westfield Group) and filled a trolley at the supermarket (Woolworths). Perhaps you bought a loaf of bread (Burns Philp) and a jar of SPC jam (Coca-Cola Amatil Limited) to go with it. At the checkout, you flicked through a few magazines (News Corp, Publishing & Broadcasting), and ended up buying a Worst Dressed issue or a Swimsuit Edition against your better judgement. You probably paid for it all on your credit card (National Australia Bank). On the way back to the car, you stopped off at the electrical store (Harvey Norman) and looked at a new fridge. Finally, you picked up a user-friendly bottle of red (Lion Nathan) and headed home for a quiet night in front of the telly (Seven Network). MLC IncomeBuilder held shares in all of the Australian companies mentioned above as at 31 May Risk. Are shares safer than cash? Stockmarket Crash! Global Recovery! Asian Crisis! Bull Market! The media loves to run with these headlines. But all they re really saying is the sharemarket is volatile in the short term nothing new there. However, the story is very different if you take a longer-term view. In fact, over the long term, investing in shares might actually be safer than leaving your money in the bank. It all depends on how you choose to look at risk. With some investments, like shares a major concern is your investment could fall in value in the short term. With others, like cash, the lesser known risk is that your investment might not earn enough or grow enough in value over the long term, which means you re putting at risk your long-term lifestyle and financial goals. Which way do you look at risk? 1

3 Annual returns of shares v. cash over the last 26 years % Dec Dec Dec Dec Dec 84 Dec Dec Dec Dec Shares Cash 26 yr average of shares Dec 89 Dec Value of $100,000 invested in December 1979 (all income reinvested) 11 Dec Dec 92 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 05 In the last 26 years, the Australian sharemarket has ended the year in the red six times. But focusing on those six negative years obscures the fact that we ve also enjoyed 20 good years over the same period. The dotted red line shows the average annual return of the sharemarket over the last 26 years. While this graph shows the volatility of the sharemarket over the last 26 years, it does not indicate future performance. Some market commentators believe the last 26 years were particularly favourable conditions for sharemarkets. If market conditions were to change and become unfavourable, it may take many years for a investment in the sharemarket to grow. Source: S&P/ASX 200 Industrials Accumulation Index (All Industrials Index prior to 6 April 2000), RBA 12 month fixed deposit rate ($5,000 to $100,000). Value ($) $6,000,000 $5,000,000 $4,000,000 $5,119,236 Inflation. The cruellest cut Another risk you have to consider when investing is the risk of inflation eating away at your investment returns. If you compare the long-term value of shares versus cash, taking inflation into account, the picture becomes even clearer. $3,000,000 $2,000,000 Source: S&P/ASX 200 Industrials Accumulation Index (All Industrials Index prior to 6 April 2000), RBA 12 month fixed deposit rate ($5,000 to $100,000), Consumer Price Inflation Index. $1,000,000 $832,874 $308,606 Dec 79 Dec 80 Dec 81 Dec 82 Dec 83 Dec 84 Dec 85 Dec 86 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Shares Cash CPI 2

4 The MLC IncomeBuilder TM investment style When people talk about the volatility or unpredictability of the sharemarket, what they re talking about is movement in share prices. But the share price is only one way to look at the value of owning shares in a company. Investing in shares can also produce an income, as many companies pay out some of their profits each year to shareholders as a reward. These income payments are called dividends. As an investor, you can use the income from dividends to help meet your financial obligations over the course of the year, or you can reinvest it. Income from shares Income from Australian shares has tended to grow in a far more predictable way than actual share prices. Instead of focusing on share price movements like many funds and fund managers, MLC IncomeBuilder looks for companies likely to generate a growing dividend stream over time. If the income from those shares continues to grow, the share price will often look after itself. Growth from shares As a result of increases in share prices, shares provide significant capital growth over the long term. However, shares can also provide financial growth in other forms. While companies typically distribute profits as dividends, many companies retain some of their profits to fund future expansion or possible acquisitions. By retaining profits, companies try to expand and improve the way they do business. If the company is successful, this ultimately benefits the shareholders in the form of more profits, more income and a related increase in the share price of their companies. These are the companies that MLC IncomeBuilder looks to invest in. The MLC IncomeBuilder investment style Invest in profitable companies. Instead of focusing on movements in share prices, MLC IncomeBuilder invests primarily in dividend-focused shares. Create a growing income stream. The income from shares has tended to grow in a far more predictable way than share prices, and MLC IncomeBuilder has delivered a consistent dividend stream. Low turnover means greater tax efficiency. MLC IncomeBuilder typically holds stocks for a longer period than other share funds, keeping transaction costs to a minimum and reducing the tax liability for investors. 3

5 How a focus on growing income builds company value Let s assume a company with $100 worth of assets is able to consistently generate an annual return of 10% profit on those assets. One of the company s policies is to distribute half of its profits as dividends to investors, while reinvesting the remaining profit back into the company, thereby increasing its assets. In year one, the company generates a profit of $10 (10% of $100 assets), half of which ($5) is paid to investors as dividends, while the other half is reinvested back into the company. This means in year two, the company starts the year with total assets of $105. Assuming the company continues to generate a 10% return on its assets, a profit of $10.50 is generated in the second year. In line with its policy, the company distributes half of that amount ($5.25) to investors as dividends, while the other half is reinvested back into itself, allowing year three to start with total assets of $ As you can see from the table below, the reinvestment of half of each year s profit (at a consistent rate of 10% pa) back into itself for a period of 10 years, will increase the company s assets by more than 50%. Investors in the company will also see their dividends increase by more than 50% over this time, demonstrating just how effective it can be to invest in companies focusing on growth from shares. Year Business Assets Profit (R.O.E) Dividend Retained Earnings Low turnover means greater tax efficiency MLC IncomeBuilder is different to other share funds in that it tends to hold stocks over longer periods of time. This strategy helps to keep transaction costs to a minimum and reduce the tax liability for investors on realised capital gains. MLC s Investment Management team monitors the appointed managers for MLC IncomeBuilder (see page 9), to ensure they manage money according to the objectives of MLC IncomeBuilder. 4

6 The story of income growth Many investors may be deceived by the relatively low income from shares when compared with the higher annual income provided by a term deposit in the first few years. However, over the long term, the steadily growing income from shares makes term deposits look like the much riskier option. You can see in the graph below that the capital value of an Australian Industrial share portfolio (the yellow line) has increased in value from $100,000 to over $1 million dollars in the last 26 years. Compare this to a term deposit (red line) where the $100,000 remains the same after 26 years. And that s without taking into account the effect of inflation. Shares vs Term Deposits Annual income generated by $100,000 invested in December 1979 to December 2005^ Income ($) Capital Value ($) $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10, Year ended 31 December Annual income from Shares (assuming income is not re-invested) Annual income from Term Deposits (assuming income is not re-invested) Capital value of Shares (assuming income is not re-invested) Capital value of Term Deposits (assuming income is not re-invested) $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 0 Source: Shares Represented by the S&P/ASX 200 Industrial Accumulation and Price indices (All Industrials Accumulation and Price indices prior to April 2000). Term Deposits Represented by the Reserve Bank of Australia (RBA) 12 month Banks Term Deposits ($10,000), prior to January 2005, the RBA 12 month Term Deposit rate ($5,000 $100,000). ^ Assuming income is not re-invested. 5

7 Create wealth by reinvesting income Cumulative value of $10,000 since inception income re-invested (July 1995 December 2005) Value ($) $35,000 $30,000 $32,462 $25,000 $20,000 $15,000 $10,000 $5,000 0 Jun 95 Jun 96 Jun 97 Jun 98 Jun 99 Jun 00 Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Dec 05 Source: MLC Historical performance is not a reliable guide to future performance. Returns are calculated on an annualised compound basis using end of month redemption prices and are net of management fees, charges, expenses and do not allow for initial/exit fees (if applicable) or policy charges. Returns are calculated in accordance with IFSA Standard No. 6. Gearing into MLC IncomeBuilder With low turnover and growing income each year, MLC IncomeBuilder may be a suitable fund for investors who are considering a gearing strategy to generate long-term wealth. Income from the fund can be used to meet interest payments or reinvested back into the fund, while over the long term, shares within the fund are expected to increase in value, providing capital growth. 6

8 MLC IncomeBuilder TM facts & figures MLC IncomeBuilder is invested primarily in dividend-focused Australian industrial shares. These shares have provided MLC IncomeBuilder investors with a growing, tax-effective income stream* since the Fund s inception in The growing income stream has also helped MLC IncomeBuilder achieve an increase in the capital value of an MLC IncomeBuilder investment. Source: MLC Investments Limited Growing income stream* and rising capital value Return on investment of $100,000 in MLC IncomeBuilder (as at 30 June financial year-end) Income ($) $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 0 Capital Value ($) $260,000 $242,720 $240,000 $220,000 $200,000 $180,000 $160,000 $140,000 $120,000 $100, IncomeBuilder Income IncomeBuilder Value Effect of buy-backs * For the years 1999, 2000, 2001 and 2003, the headline distribution rate was inflated as a result of a number of share buy-backs (for example, Commonwealth Bank, Woolworths and Lend Lease) as well as special distributions. Taking these events into consideration, the underlying distributions still grew in line with the goals of MLC IncomeBuilder. Historical performance is not a reliable guide to future performance. Returns are calculated on an annualised, compound basis using end of month redemption prices and are net of management fees, charges, expenses and do not allow for initial/exit fees (if applicable) or policy charges. Returns are calculated in accordance with IFSA Standard No. 6. 7

9 MLC IncomeBuilder is diversified across different sectors The Australian share market is made up of different sectors such as Banking & Finance, Media, Telecommunications and Transport. Companies and their sectors can perform differently at different stages of the economic cycle. By investing in a range of companies from different sectors, MLC IncomeBuilder aims to minimise the volatility of the overall portfolio and achieve more consistent returns. Where is MLC IncomeBuilder invested? As at 31 December 2005 By company... Top 10 largest equity holdings MLC IncomeBuilder the strength of shares Genuine diversification. Using a combination of investment managers with different investment styles, MLC IncomeBuilder invests across a range of quality companies in many different industries. Suitable for gearing. With low turnover and consistent income each year, MLC IncomeBuilder may be a suitable fund if you re considering a gearing strategy to create wealth over the long term. 1. National Australia Bank Financial Ex Property Trusts 8.8% 2. ANZ Financial Ex Property Trusts 7.1% 3. Westpac Bank Corp Financial Ex Property Trusts 6.3% 4. Commonwealth Bank Financial Ex Property Trusts 4.9% 5. Telstra Corp Telecommunication Services 4.7% 6. Westfield Group Listed Property Trusts 4.5% 7. Brambles Industries Industrials 4.0% 8. Fosters Group Consumer Staples 3.6% 9. Rinker Group Materials 3.1% 10. TAB Corp Holdings Consumer Discretionary 3.0% By asset class... 5% Cash & Short Term Securities By industry sector % Consumer Discretionary 11.72% Industrials 10.97% Consumer Staples 8.66% Materials 95% Industrials 38.17% Financials ex Property Trusts 8.36% Listed Property Trusts 0.02% Information Technology 6.00% Telecommunications Services 2.98% Health Care 2.68% Utilities 8

10 Who manages MLC IncomeBuilder TM? MLC IncomeBuilder is currently managed by two investment managers Maple-Brown Abbott and Vanguard Investments Australia. This strategic combination of active and index investment managers is designed to deliver MLC IncomeBuilder s key investment objective to provide investors with a growing, tax-effective income stream. Maple-Brown Abbott Limited (MBA) manages 70% of MLC IncomeBuilder. MBA was established in The company is based in Sydney and offers services to both private and institutional investors. The company is wholly owned by its staff, and the investment team consists of 18 dedicated investment professionals. MBA has over $18.4 billion in funds under management (as at 31 March 2006). Garth Rossler and Dougal Maple-Brown are the portfolio managers for MBA s MLC IncomeBuilder mandate, with stock selection and research responsibilities. MBA uses a value-oriented investment style to identify quality undervalued Australian companies. Value is assessed and defined according to a number of criteria, including Price to Earnings, Price to Cash Flow, grossed-up dividend yield, and measures of balance sheet strength. This approach is ideally suited to identifying companies with the potential to grow their dividends, and therefore makes MBA an ideal manager for MLC IncomeBuilder. MBA also assesses value on a long-term basis, and will often therefore be contrarian to other managers, purchasing stocks that are out of favour in the market, and holding them for the medium to long term until their value is recognised. This long-term approach to investing is ideal for MLC IncomeBuilder, as it helps to ensure any income is tax-effective, and does not have a high portion of realised capital gains. Vanguard Investments Australia Limited manages 30% of MLC IncomeBuilder. The company is the Australian arm of the US-based Vanguard Group, the second largest mutual fund investment manager in the US. Vanguard is a world leader in index-based investment management, and has been managing funds in an index style since The firm was one of the pioneers of the indexed approach to investing and is the world s second largest provider of mutual funds. The Vanguard Group has approximately A$38.9 billion in funds under management (as at 31 March 2006). Vanguard passively manages a portfolio of approximately 180 stocks, aiming to replicate the S&P/ASX 200 Industrials Accumulation Index as a benchmark. Using the S&P/ASX 200 Industrials Accumulation Index as a benchmark gives MLC IncomeBuilder access to a well diversified range of quality companies that are generally expected to increase their dividends over time. This index approach also has a very low level of turnover, which reduces the impact of transaction costs and taxation, and is closely aligned to MLC IncomeBuilder s primary objective of delivering an increasing tax-effective income stream. 9

11 Shares in the Bank vs money in a bank account Case Study: $10,000 invested from 1 January 1990 to 31 December 2005 NAB share price and dividends* NAB has a history of paying out part of its profits as dividends, and retaining the rest to reinvest in the company and make it more profitable in the future. The retained amount can make the share value and dividends grow. Over the past 16 years, a $10,000 investment in NAB shares would have grown to be worth $57,716. The same $10,000 invested in 1990 would also have generated more than $2,900 in tax-effective income in 2005 alone. Compare that to a term deposit, where all you d be getting back is the original $10,000 (worth a lot less now than it was in 1990), plus about $475 in income last year (fully taxable). Source: MLC Investments Limited * The returns for NAB shares are historical and not indicative of future performance. Total Income ( ) Capital Value ( ) Dividend growth Typical MLC IncomeBuilder shares Income ($) per annum (calendar year) NAB Woolworths ANZ Tabcorp Commonwealth Bank Combined income Growth in the share price and income stream from NAB shares (see the case study above) is not unique, in fact it is typical of many of the shares in MLC IncomeBuilder. The table (left) shows some of the stocks that MLC IncomeBuilder has held over the last nine years, and how the level of dividends has increased year after year. Source: Reuters, ASX, IRESS Dividend income is per share. 10

12 For more information call MLC from anywhere in Australia on Website For details on MLC s range of products and services visit our website at mlc.com.au Postal address MLC Limited PO Box 200 North Sydney NSW 2059 Information pertaining to performance, asset allocations and distributions contained within this brochure are specific to the MLC IncomeBuilder. The advice contained herein and prepared by MLC Investments Limited (ABN , AFSL ) does not take into account any person s particular objectives, needs or financial situation. Before making a decision regarding the acquisition or disposal of a Financial Product, persons should assess whether the advice is appropriate to their objectives, needs or financial situation. Persons may wish to make this assessment themselves or seek the help of an adviser. No responsibility is taken for persons acting on the information provided. Persons doing so, do so at their own risk. MLC Investments Limited, Miller Street, North Sydney NSW 2059, is the Operator of the MLC MasterKey Investment Service. MLC Investments Limited is a wholly owned subsidiary of the National Australia Bank Limited and a member of the National Australia Bank group of companies ( National group of companies ). National Australia Bank Limited does not operate the MLC MasterKey Investment Service. An investment through the MLC MasterKey Investment Service (which in turn may invest in one or a number of National group of companies products including the MLC MasterKey Unit Trust) does not represent a deposit with or a liability of the National Australia Bank Limited or other member of the National group of companies and is subject to investment risk including possible delays in repayment of income and loss of income and capital invested. None of National Australia Bank Limited (ABN ), MLC Investments Limited or other member company in the National group of companies or appointed investment managers, guarantee the capital value or performance of any MLC MasterKey product. Information about the MLC MasterKey Investment Service is contained in the current Product Disclosure Statement, copies of which are available upon request by phoning the MasterKey Service Centre on or on our website at mlc.com.au Before acquiring a financial product a person should obtain a Product Disclosure Statement (PDS) or other disclosure document relating to that product and consider the contents of that disclosure document before making a decision about whether to acquire or continue to hold the product. To acquire the product you must complete the application form attached to the relevant disclosure document MLC 06/06